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I have wondered if replacing income tax with a tax on expenditures would fix some of these questions. Sure, the rich might accrue huge bank accounts, but money isn't actually useful until it's spent. Something like a flat percentage (or maybe progressive) on anything over the computed cost of living for your family. Sure, this has its own questions: does buying investment assets count? Does it have a negative version of the EITC? Can you pro-rate multi-year expenses? I think you might be able to balance timing expenses pretty reasonably with cumulative lifetime values (math: a conservative vector field, although we could do this with income tax already). How do you deal with cash tips?
Maybe it's more bookkeeping to track expenses, but those are starting to be almost entirely automated systems that could make this feasible. But I'm also not really sure it's a better system, just a different answer to a problem with no ideal solutions.
I suspect if you had a button you could press that would make the 'rich' consume less over their lifetimes, other people consume more over their lifetimes and the 'rich' to increase their share of capital then a lot of the people pushing the unrealized capital gain tax would not support pressing the button. for them its not just about fairer consumption but also about who controls capital. so this kind of kills broad support for a consumption tax even if you are able to make it fairer in terms of lifetime consumption.
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The typical proposal for something like this is call a "consumption tax", using the economics definition of "consumption". Though, my understanding is that most proposals either just put it all into a form of sales tax or have something of an "implied consumption", where the calculation is just income minus investment/savings, where it's implied that you've used the rest on some sort of consumption. This is a simplification that has some edge cases, but it makes the calculation problem a lot simpler. It's still slightly more complicated than an income tax, because you have to include information from your various financial institutions about how much net new investment/savings you had in that year. You're probably getting a tax document from all these people, anyway, since they're taxing interest/cap gains, but they'd basically have to include this number, too.
The justification for such a tax regime is pretty much exactly what you've hit on. First, if what people actually care about for inequality is that some people can consume obscene amounts of things, then it makes sense to just tax that directly; we mostly don't care if some money sits in an investment account in perpetuity. Even if it is inherited, why would you care, except to the extent that those heirs are using it for consumption? Secondly, economists believe pretty strongly that investment/savings in capital is an important component of increasing GDP (super simple example here), and so people should be perfectly happy to incentivize investment/savings. Every dollar that you save, even in your bank account, makes the cost of capital 'cheaper' for a potential new product to be developed, improving the lives of everyone. So, if we want a rich society with cool stuff that people can consume, it's good to incentivize investment and not care if some baron has a billion dollars invested in an account somewhere, providing this capital. And if we want to make sure that people maybe moderate their consumption at least a little bit rather than going all out with opulent displays of consumption, it seems more palatable to just directly tax consumption, perhaps quite progressively.
I worry that a consumption tax would work too well and suppress overall demand for goods and services which might lead to government subsidy of "core" goods and services but would be difficult to fund because people stop spending on consumption and tax revenues go down.
There's some behavior assumptions built in there, so I admit that.
Consumption and consumer behavior is how prices are discovered and demand signals are captured. I don't know how you'd do it otherwise. Investment is good, but you have to eventually invest in a company that makes sales.
Possibly so, similar to how income taxes suppress overall income. I guess whether this is a good thing might depend on how one feels about vague things like "consumer culture".
I don't see why this would be the case. What would be the set of "core" goods and services in question?
Sure. I can't imagine consumption would go to zero, just like how income doesn't go to zero just because we tax it. People still want to earn income and consume stuff. Both income and consumption taxes have some distortionary effects and suppress some amount of things that we like... but a consumption tax just does it all slightly better. I think a shift from income to consumption tax would have, as they say, marginal effects for most people. On the low income end of the spectrum, the rate is likely to be quite low, but it may provide a small nudge for such people to think about saving a bit more (which is often good for them, individually). This should be a positive for anyone who is worried about poor people not having a lot in savings to get through the occasional tough time.
Most importantly, for people who are concerned specifically about the opulent consumption of the super wealthy, this should be incredibly appealing. If anything, it's great for figuring out which people actually care about extreme consumption inequality (who should be totally fine with investment that helps everyone)... and which mostly just hate rich people generally and want to stick it to them.
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I'm not sure exactly how I'd tie the concepts together, but somewhere here is the difference between spending that money on, I dunno, a bottle of fine wine and drinking it, and spending that money buying capital assets to make bottles of wine. Intuitively to me, it seems like the latter is "better" even if both nominally contribute to (immediate) GDP equally.
But you're not wrong that if we all spend all our money on vineyards and not finished bottles, the vineyard isn't really a productive investment either. There's probably a Russell Conjugation here: "I buy and experience valuable cultural institutions; you spend money on fleeting entertainment; and that guy over there is a drunk buying wine by the case." And maybe someone's culture values paperclips.
I'd be curious if Real Economists have words for this concept.
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